Question

Butterfly Tractors had $21.00 million in sales last year. Cost of goods sold was $9.40 million, depreciation expense was $3.40 million, interest payment on outstanding debt was $2.40 million, and the firm’s tax rate was 35%. a.What were the firm’s net income and net cash flow? (Enter your answers in millions rounded to 2 decimal places.) Net income$ million Net cash flow$ million b.What would happen to net income and cash flow if depreciation were increased by $2.40 million? (Input all amounts as positive values. Enter your answers in millions rounded to 2 decimal places.) Net income by$ million Cash flow by$ million

Answer 1

Answer:

a. The firm’s net income and net cash flow is $3.77 million and $7.17 million respectively

b. The firm’s net income and net cash flow is $2.21 million and $8.01 million respectively

Explanation:

a. The computation of the net income is shown below:

= Sales - cost of good sold - depreciation expense - interest expense - income  tax expense

where,

Income tax expense = (Sales - cost of good sold - depreciation expense - interest expense) × income tax rate

= ($21.00 million - $9.40 million - $3.40 million - $2.40 million) × 35%

= $2.03 million

The other items values would remain the same

Now put these values to the above formula  

So, the value would equal to

= $21.00 million - $9.40 million - $3.40 million - $2.40 million - $2.03 million

= $3.77 million

And the net cash flow = Net income + depreciation expense

                                     = $3.77 million + $3.40 million

                                     = $7.17 million

b. The computation of the change in the net income is shown below:

= Sales - cost of good sold - increased depreciation expense - interest expense - income  tax expense

where,

Income tax expense = (Sales - cost of good sold - increased depreciation expense - interest expense) × income tax rate

= ($21.00 million - $9.40 million - $5.80 million - $2.40 million) × 35%

= $1.19 million

The other items values would remain the same

Now put these values to the above formula  

So, the value would equal to

= $21.00 million - $9.40 million - $5.80 million - $2.40 million - $1.19 million

= $2.21 million

And the net cash flow = Net income + increased depreciation expense

                                     = $2.21 million + $5.80 million

                                     = $8.01 million